There is no question that Forex trading is lucrative. However, one should always remember that it is never devoid of risk. Fortunately, you can employ a number of ways to offset or evade negative outcomes and ensure returns. One risk management strategy is to understand both fundamental and technical analysis. Fundamental analysis in Forex involves looking at a country’s overall state of economy, interest rates, production, and employment rating.
Technical analysis on the other hand gives forecast of price directions by taking into account past market data, specifically price and volume. By familiarizing yourself with these two security analysis disciplines, you will be able to measure risk, and therefore manage it.
Another strategy is the 2% rule, which means you should not trade more than 2% of your total trading capital. Putting a stop loss order at this amount means that you would have to make 50 failed trades before your total trading capital is wiped out. Looking at the price chart will help you identify the specific entry and exit trading points.
Most, if not all trading platforms nowadays allow you to make stop loss orders on the interface itself. This rule applies even if you feel very certain that the outcome is favorable. Stories of traders wiping out five years’ worth of earnings in a single trade are not at all uncommon. Keep in mind that a high degree of volatility is inherent to this financial market and price shifts can be in your favor now and against you in a few hours.
The 2% risk per trade principle while a proven method, is frequently disregarded because a number of investors become either overly enthusiastic with the thought of making a lot of money or too sentimental with failed trades. This brings us to one more pointer: trade logically, not impulsively. You should never go about Forex trading as if you are gambling. Chasing your losses by betting twice as much is often not the best strategy. These highlights further the necessity of adhering to the 2% rule.
The spot Forex market is highly leveraged. Using leverage means you can put use a $1,000 deposit and borrowing the rest from the broker to purchase a contract worth $100,000. Just remember that applying leverage on your trades can cut both ways, it can magnify earnings just as well as it does losses. So it is wise to only use leverage when the advantage is clearly on your side.